Ritz sells for US$177.5M

The Ritz-Carlton, Grand Cayman has a new owner: a US-based private equity firm that has significant investments in the hospitality industry, a working relationship with the Ritz management company and knowledge of the Cayman Islands resort. Local real estate brokers said the sale should be good for the Ritz hotel, and is another positive sign for the Islands’ resort sector.

At a public auction Wednesday, the property’s secured lender RC Cayman Holdings LLC purchased the Ritz at the reserve price of US$177.5 million.

The event was the largest real estate auction in the history of the Cayman Islands.

‘Highly motivated’

RC Cayman is an affiliate of Five Mile Capital Partners LLC, an alternative investment and asset management company based in Stamford, Connecticut, that has more than US$2 billion in equity, including close to US$1 billion in funds invested in the hospitality sector, primarily in the US, Mexico and Caribbean, a Five Mile representative said.

“The property now has a highly motivated equity investor who is really focused on making sure the asset continues its five-star, world-class perception and that it just continues to grow,” he said. “We will do that through additional capital, intensive ownership and a great relationship with the Ritz.”

In March, RC Cayman filed a writ demanding the immediate repayment of nearly US$234 million from Ritz developer Michael Ryan, and appointed Kris Beighton and Keith Blake of KPMG as joint receivers of companies, formerly controlled by Mr. Ryan, that were behind the development and ownership of the Ritz.

Court documents contain a review by the Deloitte accounting firm showing the Ritz receivership companies to have been “insolvent to the tune of” more than US$340 million on a balance sheet basis, with about US$261 million in assets, US$250 million claimed by secured creditor RC Cayman and US$351 million in unsecured credit – including CI$6 million that is allegedly owed to the Cayman government.

When asked what the sale of the hotel means for unsecured creditors, the Five Mile representative said, “They get wiped out.”

After the secured creditor is satisfied, the unsecured creditors can lay claim to whatever is owed to them by the receivership companies that no longer own what was their biggest asset, the resort property.

The sale of the Ritz clears the resort of debt and brings in an owner that has significant cash equity and is financially motivated to make the resort function better, the company representative said.

“The truth is the loan was in default. There was over US$250 million of debt on the property, so you had an existing owner who didn’t have any equity in the property, which meant that owner isn’t motivated to act in a way that maximises the value of the asset,” he said. “Because that owner is underwater.”

A complex legal case is before the Cayman Islands Grand Court, pitting the receivership companies against Mr. Ryan and companies he still controls. Each side argues the other owes money, including an allegation that Mr. Ryan and one of his companies received US$44 million over seven years from the Ritz companies before he lost control of them.

The Five Mile representative said he couldn’t comment on the ongoing court matters. The Caymanian Compass’ request for comment from Mr. Ryan was not immediately returned Thursday.

Still the Ritz

Along with the property, the sale included the transfer of the long-term management contract of The Ritz-Carlton Hotel Company of the Cayman Islands Ltd., which lasts for about 20 more years. The representative said his firm has been active as a lender for properties associated with the Ritz and its parent company Marriott International. He said the firm has about $1 billion in exposure in the hospitality sector, or more than 18,000 rooms under its control.

He said that while the 300-room hotel has been managed well by the Ritz, on a financial basis the property has not been performing up to its perception due to insufficient capital. For example, one year the Ritz had US$7 million in cash flow, when he said it should have been more like US$20 million.

“If the hotel was doing so well, why are there so many unsecured creditors?” he said.

When entering into any new venture, the firm’s plan is to keep the asset for five to 10 years, and the Grand Cayman property is no different, he said.

“Over the next several years the plan would be to put additional capital into the asset to renovate the hotel,” he said.

The firm intends for the property to remain as a Ritz resort and also to keep up its relationship with chef Eric Ripert, whose restaurant Blue has consistently drawn top ratings from AAA and Wine Spectator. The firm is also exploring its options regarding the Ritz’s associated residential development land. Whether that means developing it themselves or selling the land to a developer, the firm is not going to act hastily, the representative said.

Expansion plans for the Blue Tip Nine, which is strata common property, are also under consideration. “We would absolutely like to figure out a way to expand the golf course and make it more attractive to golfers,” the representative said, adding that as nice as the Blue Tip course is, its potential is limited by the fact it only has nine holes.

Greater certainty

In a news release announcing RC Cayman’s successful bid, Rick Finlay of Conyers Dill & Pearman, RC Cayman’s local representative, said, “With this sale, only the underlying ownership of the property changes; the Resort will continue to be operated as before, and by the same management structure.”

He said, “It’s a very satisfactory outcome, given the long-standing uncertainty surrounding the Ritz‐Carlton Grand Cayman Resort.”

IRG broker/owner Jeremy Hurst said the clarity brought about by the sale should help the resort, its development property and the real estate market as a whole.

“Uncertainty is the worst threat to any market, whether it be the hospitality market or the real estate market. The somewhat negative cloud surrounding a property that is for sale by auction is something the market prefers to avoid. Obviously having removed that question mark over the Ritz is a positive move for the Cayman Islands economy and the Cayman Islands real estate market,” Mr. Hurst said.

“These are all huge positives for our market. The impact won’t be felt immediately, but over the next five years it’ll be a huge positive for us, no question,” he said.

Five Mile deals

Founded in 2003, Five Mile’s investment portfolio includes all sorts of properties, not just hotels. For example, in late August 2012, the firm bought a Maryland mall for US$100 million and planned to invest US$20 million in improvements, according to the Washington Post.

In 2008, Five Mile and a partner company bought the 62-storey John Hancock Tower in Boston, Massachusetts, for US$660.6 million. In late December 2010, they sold the building for US$930 million, according to the New York Times.

In January 2011, Five Mile and a partner company announced they had acquired a 1.2 million-square-foot Class A office complex in Houston, Texas.

In August 2011, a joint venture led by Five Mile gained control of 143 hotels by acquiring US$700 million of debt owed by Red Roof Inns Inc., according to Bloomberg, which cites an anonymous source saying they purchased the debt for 50 cents on the dollar. That deal also came with a reported US$70 million of improvements to the properties.